hi-stat discussion paper

Hi-Stat Discussion Paper

Research Unit for Statisticaland Empirical Analysis in Social Sciences (Hi-Stat)

Hi-StatInstitute of Economic Research

Hitotsubashi University

2-1 Naka, Kunitatchi Tokyo, 186-8601 Japan

http://gcoe.ier.hit-u.ac.jp

Global COE Hi-Stat Discussion Paper Series

October 2010

AMU and Monetary Cooperation in Asia

Eiji OgawaJunko Shimizu

153

AMU and monetary cooperation in Asia

October 2010

Eiji Ogawa† (Hitotsubashi University)

Junko Shimizu‡ (Senshu University)

We thank the participants at the Workshop on "Asian Economy After the Global Financial Crisis" that was organized by ADBI and NEAR on August 20, 2010 for useful comments. † Professor of Graduate School of Commerce and Management, Hitotsubashi University. E-mail: [email protected]

‡ Associate Professor of School of Commerce, Senshu University, E-mail: [email protected]

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mailto:[email protected]




Abstract

Regional monetary and financial cooperation among the monetary authorities

of Asian countries have been further strengthening through the recent global financial

crisis in 2007-2008. Finance Ministers and Central Bank Governors of the ASEAN

Members States, People’s Republic of China (PRC), Japan and Korea (ASEAN plus

three) and the monetary authority of Hong Kong, China announced that the Chiang Mai

Initiative Multilateralization (CMIM) agreement came into effect on March 24, 2010.

They also reached agreement on establishing a surveillance office, which is called an

ASEAN plus three Macroeconomic Research Office (AMRO) and would ensure

technical details of regional surveillance.

The regional monetary cooperation in Asia has been discussed for years. For

example, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU),

which is a common currency basket computed as a weighted average of the thirteen

ASEAN plus three currencies, and AMU Deviation Indicators (AMU DIs), which

indicates deviation of each Asian currency in terms of the AMU compared with the

benchmark rate. The AMU and the AMU DIs are considered as both surveillance

measures under the Chiang Mai Initiative and coordinated exchange rate policies

among Asian countries.

In this paper, we show that monitoring the AMU and the AMU DIs plays an

important role in the regional surveillance process under the CMIM. By using daily and

monthly data of AMU and AMU DIs in the period between January 2000 to June 2010,

which are available in a website of the Research Institute of Economy, Trade, and

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Industry (RIETI), we examine their usefulness as a surveillance indicator. Our studies of

AMU and AMU DIs confirm as follows: First, an AMU peg system stabilizes Nominal

Effective Exchange Rate (NEER) of each Asian country. Second, the AMU and the AMU

DIs could warn overvaluation or undervaluation for each of Asia currencies. Third, trade

imbalances within the region have been growing as the AMU DIs have been widening.

Forth, the AMU DIs could predict huge capital inflows and outflows for the Asian country.

The above fact-findings support usefulness of using the AMU and the AMU DIs as

surveillance indicators for monetary cooperation in Asia.

Keywords: regional monetary cooperation, common currency basket, Asian Monetary

Unit

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1. Introduction

The Regional monetary and financial cooperation among the monetary

authorities of Asian countries have been further strengthening through the recent global

financial crisis in 2007-2008. The Finance Ministers and Central Bank Governors of the

ASEAN Members States, People’s Republic of China (PRC), Japan and Korea (ASEAN

plus three) and the monetary authority of Hong Kong, China announced that the Chiang

Mai Initiative Multilateralization (CMIM) Agreement has come into effect on March 24,

2010. They also reached agreement on establishing a surveillance office in Singapore,

which is called the ASEAN plus three Macroeconomic Research Office (AMRO).

Financial Ministers of the ASEAN plus three now have to ensure that technical details

are ironed out. The AMRO will monitor and analyze the regional economies, which will

contribute to early detection of possible currency crises, swift implementation of

remedial actions, and effective decision-making in the region.

The regional monetary cooperation in Asia has been discussed for years. It

would be necessary not only for preventing possible currency crises in the future but

also for keeping intra-regional capital flows and exchange rates stable. We should

consider how we will promote the regional monetary cooperation. One way is to create a

common currency basket (regional monetary unit, RMU) and use it for economic

surveillance. A common currency basket system with a fluctuation band, which is similar

to so-called "BBC rule" suggested by Williamson (2000), would be an effective way to

detect exchange rate misalignment among Asian currencies.

Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU),

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which is a common currency basket computed as a weighted average of thirteen Asian

currencies, and AMU deviation indicators (AMU DIs), which indicates deviation of each

Asian currency in terms of the AMU compared with the benchmark rate1. The AMU and

the AMU DIs are considered as both surveillance measures under the Chiang Mai

Initiative and coordinated exchange rate policies among East Asian countries. In this

paper, we show that monitoring the AMU and the AMU DIs plays an important role in the

regional surveillance process under the CMIM. By using daily and monthly data of AMU

and AMU DIs in the period between January 2000 to June 2010, which are available in

a website of the Research Institute of Economy, Trade, and Industry (RIETI), we

consider them from the following standpoints: First, how did the AMU related with three

major currencies, the US dollar, the euro and the yen? Second, how could they stabilize

a nominal effective exchange rate (NEER)? Third, how did they predict any currency

crisis during the Asian currency crisis and during the recent 2007-2008 crisis?

The rest of this paper is organized as follows. Section 2 presents an overview

of previous researches for a common currency basket proposal for Asian countries.

Section 3 investigates the AMU and its relationship with the three major currencies.

Section 4 focuses on comparison between a NEER calculated by the Bank for

International Settlements (BIS) and a NEER under the hypothetical AMU peg system.

The comparisons tell us how the AMU stabilizes NEER of Asian currencies. Section 5

investigates The AMU and the AMU DIs during the Asian currency crisis in 1997 and

during the recent global financial crisis in 2007-2008. Finally, section 6 summarizes our

analytical results and presents the conclusion.

1 For details on AMU and AMU Deviation Indicators, see Appendix.

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2. Related researches about a common currency basket in Asia

Some of Asian countries, which include Singapore and Malaysia (since July

2005), have adopted a currency system in line with a Basket, Band and Crawling (BBC)

rule 2 after the Asian currency crisis. During the recent global financial crisis in

2007-2008, however, a number of Asian currencies depreciated sharply while the

Japanese yen has been appreciating against the other Asian currencies. At the same

time, the Chinese yuan has been kept stabilizing especially against the US dollar

although the Chinese government announced to adopt a managed floating exchange

rate system with reference to a currency basket. As a result, movements in

intra-regional exchange rates among Asian currencies have changed dramatically. Such

a large fluctuation of the intra-regional exchange rates is undesirable for the Asian

economy where private sector has established production networks.

Since the Asian economy has de facto increasing interdependency in terms of

intra-regional trade and foreign direct investments, it is indispensable to establish

regional currency coordination in order to minimize exchange rate fluctuations or

exchange rate risks in international trade and investments within the region. A proposed

approach in this regard is to create a common currency basket, which will serve as an

anchor for Asian currencies. Ogawa and Shimizu (2005) proposed the Asian Monetary

Unit (AMU), which is computed as the weighted average of thirteen Asian currencies

(ASEAN, People’s Republic of China (PRC), Japan, and Republic of Korea). Moreover,

we have developed AMU Deviation Indicators based on the AMU in order to serve them

for surveillance over fluctuations and misalignments of intra-regional exchange rates

2 The BBC rule was proposed by Williamson (2000).

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under the Chiang Mai Initiative.3 The AMU Deviation Indicators are employed as

benchmarks for enabling the monetary authorities of the Asian countries to keep their

regional coordination in exchange rate policies. The monetary authorities could ensure

that each of Asian currencies does not so much deviate from a common currency

basket or the AMU. This would enable the Asian countries to achieve stability of

intra-regional exchange rates and float jointly against outside currencies which include

the US dollar and euro. Ogawa and Shimizu (2007) proposed a step-wise approach for

transitioning from an individual currency basket system to a common currency basket

system in Asia as an indicative proposal.

There is another proposal to stabilize the intra-regional exchange rates among

Asian currencies without depending on any common currency basket. For example, Ma

and McCauley (2008) suggest that stability of intra-Asian exchange rates might build on

similar national policies of stabilizing home currencies against their own respective

currency baskets because of their similarities of trade-weighted currency basket.

Similarly, Wyplosz and Park (2008) advocate adopting own currency basket peg

vis-à-vis its non-regional trade partners, which would be enough to stabilize the

exchange rate. Both of the papers indicate that effective exchange rates of Asian

currencies can be stabilized without any further monetary cooperation. Shimizu and

Ogawa (2009) obtain an analytical result that we have a strong relationships among

NEER, the AMU and AMU Deviation Indicators even during the period of global financial

crisis. It suggests that an individual basket system is appropriate for Asian countries at

3 Such a unit has also been extensively discussed in East Asia, for example, in the ADB

(Kuroda and Kawai, 2003). The data of AMU and AMU Deviation Indicators has been

published on the website of RIETI (http://www.rieti.go.jp/users/amu/en/index.html) since

September 2005.

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the first stage of exchange rate policy coordination. In this sense, it seems that the

above-mentioned proposals are not essentially different at least as the first step.

3. Decomposition of the AMU

Currency regimes that are adopted by Asian countries are different with each

other and their choices are broad ranging from a hard peg (a currency board), a

managed float (with reference to a currency basket) to a free float. In other word, Asian

currencies' degree of linkage with the US dollar vary from very strong (under a hard peg

to the US dollar), weak (under a soft peg to the US dollar) to no relationship (under a

free float). The AMU also has some degree of linkage with the US dollar because it is

composed of the thirteen Asian currencies. Movements in the AMU should reflect the

choice of currency regime in the region.

Following the methods of Frankel and Wei (1994), we identify estimated

coefficients on the US dollar, the euro and the Japanese yen for the AMU to investigate

how strong linkages the AMU has the three major currencies. We use daily data of

exchange rates to estimate the following regression equation for each year of full

sample period from 2000 to 2010.4

SfrYene /SfrEuroSfrUSDoSfrAMU cececce 3/2/1/

If Asian countries actually shift their currency regimes from the strict or de fatco US

dollar peg system to an individual currency basket system, the AMU's linkage with the

US dollar becomes weaker and at the same time its relationship with the euro becomes

4 In the sample of 2010, we use daily data from Jan 4 to June 30, 2010. The data of foreign exchange rate vis-à-vis the AMU are from RIETI and Datastream.

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stronger. Since the Japanese yen is one of the composition currencies of the AMU, a

coefficient on the Japanese yen should be the same as a weight of the Japanese yen in

the AMU. However, if an estimated coefficient is smaller than the basket weight, it

means that the monetary authorities of the other Asian countries conduct an exchange

rate policy without caring about any stability against the Japanese yen. In this regards,

linkages of the AMU with the three major currencies reflects currency regime or

exchange rate policy adopted by the monetary authorities of the Asian countries.

Table 1 summarizes the analytical results of the regression. Figure 1 plots

movements in the estimated coefficients of the three major currencies year by year. In

the sub-sample periods from 2000 to 2005, coefficients on the US dollar decreased from

70% to 58%. On one hand, coefficients on the Japanese yen increased from 32% to

37%. Coefficients on the euro became significant in 2003 and 2004 even though they

are just about 5%. The analytical results indicate that the Asian countries shifted from

the US dollar peg system to an individual basket peg system.

However, in the sub-sample periods from 2006 to 2009, coefficients on the US

dollar and the euro increased from 63% to 68% and from 8% to 15 % in 2008,

respectively. In contrast, coefficients on the Japanese yen decreased from 31% to 21%.

The analytical results indicate that Asian countries shifted back to a pro-US dollar

foreign exchange rate policy or a US dollar peg system again. Comparison with

estimated coefficients on the Japanese yen and its basket weight in the AMU shows that

the former (37.63) was larger than the later (27.80) in 2005. However the former (21.23)

was smaller than the latter (26.44) in 2010. The analytical results suggest that the

monetary authorities of the other Asian countries shifted from a pro-Japanese yen

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foreign exchange rate policy to a pro-US dollar exchange rate policy recently.5

Adopting own individual currency basket peg system would contribute to

stabilization of the intra-regional foreign exchange rates among the Asian currencies in

the future as the related researches in the previous suggested. However, their current

exchange rate policy is still far from an individual currency basket system in spite that

the monetary authorities should target not heavily the US dollar but a currency basket.

This is why we need to use some common indicators, such as the AMU and the AMU

Deviation Indicators, for surveillance over intra-regional exchange rates.

4. How could the AMU stabilize effective exchange rates?

There are some previous researches which investigate stabilization effects of a

common currency basket peg system on effective exchange rates of the Asian

currencies. For example, Williamson (2005) investigated whether use of a common

currency basket would provide adequate stability of effective exchange rate of the

participating country currencies. He supposed two exchange rate systems, which

include an individual currency basket peg system and a common G3 currency basket

peg system. He showed that the latter system could relatively stabilize NEERs of Asian

currencies compared with the former system. Similarly, Ogawa and Shimizu (2006)

simulated how NEERs would have moved under alternative exchange rate systems

which include an individual currency basket system, a G3 common currency basket

system and an AMU peg system by using data of exchange rates of Asian currencies

vis-à-vis the AMU during a sample period from 2000 to 2004. They obtained an

5 Given the strong linkage of the Chinese yuan with the US dollar, it can be interpreted that Asian countries shifted to a pro-Chinese yuan exchange rate policy.

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analytical result that the AMU peg system stabilizes the NEERs more effectively for

Indonesia, the Philippines, Republic of Korea, and Thailand than the other peg systems.

In this paper, we extend the sample period from January 2005 and June 2010

to investigate the stabilization effects of the AMU peg system on NEERs of East Asian

currencies while we base on Ogawa and Shimizu (2006). Specifically, we compare

standard deviations of NEERs under a hypothetical AMU peg system with those of

NEERs that are calculated by the BIS (2005=100). Exchange rates of the Asian

currencies in terms of the AMU, which are standardized as 100 in January 2005, are

used to simulate NEERs under the hypothetical AMU peg system. Basket weights on

each currency of NEER are same as those of NEERs that are calculated by the BIS.

Table 2 summarizes the analytical results. Standard deviations of the NEERs

under the hypothetical AMU peg system are lower than those of actual (historical)

NEER calculated by the BIS. Accordingly, we obtain an analytical result that the AMU

peg system stabilizes the NEER of Asian currencies even during the global financial

crisis. We also find that differentials in the standard deviations between actual NEERs

and AMU-peg NEERs vary by country. For example, in the case of Singapore, the

standard deviation of NEER calculated by the BIS was 3.728 while that of NEER under

the hypothetical AMU peg system was 2.321. Similarly, in the case of Malaysia, the

standard deviation of NEER calculated by the BIS was 2.699 while that of NEER under

the hypothetical AMU peg system was 1.677. Thus, the differences are small in the case

of Singapore and Malaysia that adopt a managed floating exchange rate system with

reference to a currency basket. On the other hand, in the case of Republic of Korea that

adopts free floating exchange rate system, the standard deviation of NEER calculated

by the BIS was 13.038 while that of NEER under the hypothetical AMU peg system was

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1.160. Similarly, in the case of Indonesia, the standard deviation of NEER calculated by

the BIS was 7.785 while that of NEER under the hypothetical AMU peg system was

1.630. The results indicate that the NEER of free floating currencies would become

dramatically more stable if the monetary authorities adopt an AMU peg system.

Figure 2 plots movements in the above two kinds of NEER as well as a nominal

exchange rate in terms of the US dollar for reference in a period between January 2005

and June 2010 by country. In the case of People’s Republic of China (PRC), an actual

NEER calculated by the BIS appreciated more than 10 % during the global financial

crisis (2007-2008) although a nominal exchange rate of the Chinese yuan in terms of

the US dollar was kept very stable. If the monetary authority of People’s Republic of

China (PRC) adopted the AMU peg system in the same period, the Chinese yuan would

appreciate less than half in terms of the NEER. In the case of Republic of Korea, both

the actual NEER calculated by the BIS and the nominal exchange rate of the Korean

won in terms of the US dollar depreciated more than 30% during the global financial

crisis. If the monetary authority of Republic of Korea adopted the AMU peg system in

the same period, their NEER would be kept very stable. The analytical results suggest

that the AMU peg system would stabilize the NEER of Asian currencies even during the

global financial crisis.

5. AMU and AMU Deviation Indicators during the Crises

Our researches use the AMU and the AMU Deviation Indicators (DIs) to

conduct macro-economic analysis for surveillance purposes. In this section, we have a

particular focus on the Asian currency crisis in 1997 and the recent global financial crisis

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in 2007-2008. We investigate how accurately The AMU and the AMU DIs showed crisis

situation during the two crises.

5-1. AMU during the Asian currency crisis in 1997

At first, we retroact both the AMU and the AMU DIs in the period around the

Asian currency crisis in 1997 before the benchmark period 2000-20016. Figure 3 shows

the movements of the AMU in terms of the US dollar, the euro (weighted average of

European currencies before January 1999) and the US$-euro basket currency from

January 1995 to the end of 2000. In 1996, exchange rate of the AMU in terms of the

euro was at around 1.0 while the exchange rate in terms of the US dollar was larger

than 1.2, given that the benchmark period for the exchange rates was 2000-2001.. It

means that the AMU was more than 20 percent overvalued vis-à-vis the US dollar

compared with the AMU benchmark year (2000-2001) in the period before the Asian

crisis.

Figure 4 shows movements in AMU DIs of some Asian currencies before and

after the Asian currency crisis. It is clear that AMU DIs of crisis-hit currencies were

overvalued before the Asian currency crisis. Particularly, an AMU DI of the Indonesian

rupiah had the largest overvaluation among the Asian currencies (Figure 4-(a)). Figure

4-(b) shows that AMU DIs of the Thai baht and the Malaysian ringgit were also more

than 20 % overvalued. On one hand, an AMU DI of the Korean won was below 10 %

overvalued when the Thai baht started to collapse in July 1997. After then, it climbed

gradually up to 17% of overvaluation. It started to depreciate sharply to almost minus

6 For the calculation of the AMU and AMU DIs backward in 1990s, we use the simulated euro before the introduction of the euro.

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40% of undervaluation in December 1997. Thus, the movements in the AMU DIs

showed an exact scenario of currency crisis contagion from Thailand to Republic of

Korea. In contrast, AMU DIs of the Singapore dollar, the Chinese yuan and the

Japanese yen were undervalued before the Asian currency crisis. Especially, those of

the Chinese yuan and the Japanese yen were below minus 20 of undervaluation, which

means that the crisis-hit currencies were more than 40 % overvalued compared with the

two major Asian currencies.

When we watch movements in both The AMU and the AMU DIs during the

Asian currency crisis, we can find that the AMU was more than 20 percent overvalued

vis-à-vis the US dollar and the crisis-hit currencies were more than 40 % overvalued

compared with the Chinese yuan and the Japanese yen. These results suggest that the

monetary authority should monitor The AMU and the AMU DIs to find any signs for

predicting a currency crisis in the near future.

5-2. AMU during the recent global financial crisis in 2007-2008

Some of Asian currencies have been depreciating against the US dollar as a

result of the sell-off of local currencies accompanying the capital outflows related with

deleveraging by US and European financial institutions since 2007. It dramatically

happened since the Lehman shock on September 15, 2008. The only exception was the

Japanese yen, which has appreciated substantially against the US dollar. The Chinese

yuan has been kept relatively stable vis-à-vis the US dollar by the Chinese monetary

authority’s heavy intervention in foreign exchange market even during the global

financial period. The Singapore dollar and the Malaysia ringgit also have not so much

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depreciated against the US dollar because the monetary authorities has kept a currency

basket system. In contrast, the Korean won has had much larger depreciation than any

other Asian currency. The Thai baht and the Indonesian rupiah also have depreciated

due to the sub-prime mortgage problem and fallout from the Lehman Brothers' demise.

Figure 5 shows movements in AMU DIs from January 2000 to March 2010. It is

clear that the Asian currencies have been widening in terms of increasing weighted

averages of AMU DIs as Ogawa and Yoshimi (2008) pointed out. The increasing

weighted averages of AMU DIs might reflect in regional trade imbalances in some

extents since the benchmark period to calculate AMU DIs is set as the period when total

trade balances (intra-regional trade balances) of the Asian countries was the closest to

zero., Figure 6 shows movements in trade balances within the region by country from

1st quarter of 2000 to 4th quarter of 2009. Trade imbalances within the region have

been growing as the weighted average of AMU DIs was increasing. Especially, a large

surplus trend of regional trade balance suddenly turned to a large deficit once the

subprime crisis happened in the 3rd quarter of 2008. The fact-findings suggest us that

sudden and volatile movements in the AMU DIs have negative impacts on the

intra-regional trades among the Asian countries.

The volatile movements in the AMU DIs also might be caused by erratic capital

flows. Suppose that we set a plus/minus 15％ of fluctuation band of AMU DIs where

plus/minus 15％ of fluctuation band is the same as the fluctuation band in Exchange

Rate Mechanism (ERM) II in the EU. Figure 5 shows that most of the Asian currencies

except for the Philippine peso were kept within the band during a period from 2000 to

2005. Since 2006, however, an AMU DI of the Korean won started to rise beyond the

upper band of 15% while the Thai baht and the Singapore dollar followed this upward

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trend. In contrast, an AMU DI of the Japanese yen was undervalued.

What caused the currencies to deviate from their benchmark level? One

possible answer is a carry trade between the Japanese yen and other currencies. The

Japanese yen was highly involved into carry trade strategies as a funding currency

because of their continuing extremely low interest rates in 2000’s7. Higher interest rates

for other Asian currencies which include the Korean won and the Thai baht were no

exception as an investing currency of yen related carry trade. As Gyntelberg (2009)

indicates that net purchases of Thai equities by non-resident investors lead to

appreciation of the Thai baht in 2007, the movements in capital flows is one of the

important factors to destabilize the intra-regional exchange rate8.

In the rest of this section, we investigate relationships between the AMU DIs

and capital flows. We focus on three volatile Asian currencies which include the Korean

won, the Indonesian rupiah and the Thailand baht to compare their AMU DIs and capital

flows, especially “Other Investments” in the balance of payments by using data from the

International Financial Statistics, IMF. Figure 7 shows relationships between the AMU

DIs and the “Other Investments” for the three countries.

In the case of Korea, the AMU DI went up gradually from the middle of 2004

and was kept above 15% during a period from the 2nd quarter of 2006 to 4th quarter of

2007. In this period, Korea had large capital inflows at a liability side of "Other

Investments". In the 3rd quarter of 2008, the AMU DI of the Korean won sharply went

down below minus 15 % of undervaluation. At the same time, large capital outflows

7 Hottori and Shin (2007) confirmed that the volumes of carry trade involving the yen were

high when interest differential against the yen were high. 8 Plantin and Shin (2006) express that a high-yield currency will go “up by the stairs” and come “down with the elevator”.

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occurred at both a liability and asset side of "Other Investment".

In the case of Indonesia, large capital outflows occurred at an asset side of

"Other Investments" in the 3rd quarter of 2008 while the AMU DI of the Indonesian

rupiah went down below 15 % of undervaluation.

The case of Thailand is different from the formers. When the AMU DI of the

Thai baht climbed up above 15% of overvaluation during a period from the 1st quarter of

2007 to the 1st quarter of 2008, Thailand had no large capital inflows except in the 1st

quarter of 2008. It is because the capital controls which was suddenly introduced by the

Bank of Thailand in December 2006 and eliminated on March 3, 2008. Actually, the Thai

baht did not sharply depreciate like the other two currencies during the recent global

financial crisis 2007-2008.

These fact-findings indicate that the AMU DI's reach to an upper band, for

example plus 15% of fluctuation band, could alert the excess capital inflows that might

cause capital outflows afterward. Thus, monitoring the AMU DIs is useful to predict the

excess capital inflow/outflow of the country.

6. Conclusion

In this paper, we showed that monitoring the AMU and the AMU DIs plays an

important role in the regional surveillance process in Asia. Daily and monthly data of

AMU and AMU DIs are used to make surveillance over intra-regional exchange rates

among the Asian currencies. Our investigation of the AMU and the AMU DIs showed the

following fact-findings: First, the AMU peg system stabilizes NEERs of East Asian

currencies. Second, the AMU and the AMU DIs during the period just before the Asian

17

currency crisis in 1997 shows that a weighted average of the Asian currencies was

overvalued against the US dollar while the currencies of crisis-hit countries also were

overvalued against the other Asian currencies. Thus, both the AMU and the AMU DIs

could alert the overvaluation of the Asian currencies before the Asian currency crisis.

Third, trade imbalances within the region were growing as the AMU DIs were widening

among the Asian currencies. Forth, the AMU DIs could predict the excess capital inflows

into the countries and capital outflows from the countries. The fact-findings support the

usefulness of using both the AMU and the AMU DIs as a surveillance indicator for

monetary cooperation in Asia.

A practical way to utilize the AMU DI as a surveillance indicator will be

discussed continuously as a future issue. For example, how to decide a fluctuation band

of the AMU DI is an important issue. In order to decide the fluctuation band, we need to

analyze the relationship between interest differentials and capital inflows/outflows. This

paper focused on the AMU and the AMU DIs only in terms of nominal exchange rates.

The nominal AMU and AMU DIs are suit for daily surveillance over nominal exchange

rates and capital inflows/outflows while we need to use The AMU and the AMU DI in

terms of real exchange rates for macroeconomic surveillances over exports imports,

and trade balances as well as foreign direct investments. These remain issues to be

considered in future.

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Appendix: The AMU and AMU Deviation Indicator

i. Calculating the AMU

We calculated the AMU according to the approach employed for calculating the

European Currency Unit (ECU) under the EMS before the introduction of the euro in

1999. Just as the ECU was defined as a basket of currencies of member countries of

the European Union (EU), the AMU has been defined as a basket of currencies of the

ASEAN 10+3 countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the

Philippines, Singapore, Thailand, Vietnam, Japan, People’s Republic of China (PRC),

and Republic of Korea). The weight assigned to each currency in this basket is based

on the share of GDP measured at Purchasing Power Parity (PPP), and overall trade

volumes (the sum of exports and imports) of each sample country. We calculated the

share of GDP measured at PPP and trade volumes for each country using the average

of the last three years in order to arrive at the currency shares of the AMU (the current

version is based on 2005-2007).

Since both the United States and EU countries are important trading partners for East

Asia, the AMU is quoted in terms of a weighted average of the US dollar and euro. The

weighted average of the US dollar and the euro (hereafter, US$-euro) is based on the

trade volumes of East Asian countries with the United States and EU. The weights

assigned to the US dollar and euro were 65% and 35%, respectively.

Subsequently, a benchmark period in order to calculate AMU Deviation

Indicators was determined. The benchmark period was defined in the following manner.

The total trade balance of member countries (intra-regional trade balance), total trade

21

balance of the member countries (excluding Japan) with Japan, and total trade balance

of member countries with the rest of world must be approximately zero. Consequently, it

was found that the trade balance in 2001 was the closest to zero. Assuming a one-year

time lag before changes in exchange rates affect trade volumes, we chose 2000 and

2001 as the benchmark period. For the benchmark period, the exchange rate of the

AMU in terms of the US$-euro was set at unity. We defined the exchange rate of each

East Asian currency in terms of the AMU during the benchmark period as the

benchmark exchange rate.

Overall, the AMU weights were calculated based on both the arithmetic share

of trade volumes and GDP measured at PPP. The table below indicates the AMU basket

weights and benchmark exchange rates.

22

― AMU Basket Weights of East Asian Currencies ―

(revis ed in 10/2010**** , benc hm ark year= 2000/2001)

T radevolum e* %

GD Pm eas ured at

P P P ** ,%

Arithm eticaverage

s hares % (a)

B enc hm arkexc hange rate* * *

(b)

AMU w eights(a)/(b)

B runei 0 .35 0.13 0.24 0.589114 0.0041

C am bodia 0.21 0.17 0.19 0.000270 6.9779

C hina 26.48 46.65 36.57 0.125109 2.9228

Indones ia 5.68 5.54 5.61 0.000113 497.9163

Japan 22.40 28.15 25.28 0.009065 27.8842

S outh K orea 13.03 8.27 10.65 0.000859 123.9422

Laos 0.13 0.08 0.10 0.000136 7.5226

Malays ia 7.37 2.36 4.87 0.272534 0.1786

Myanm ar 0.37 0.37 0.37 0.159215 0.0232

P hilipp ines 2.22 1.95 2.09 0.021903 0.9527

S ingapore 12.74 1.48 7.11 0.589160 0.1207

Thailand 6.54 3.41 4.98 0.024543 2.0272

Vietnam 2.48 1.44 1.96 0.000072 273.9808

**** : A M U s hares and weights w ere revic ed in O c t. 2010. Th is is the 6 th vers ion.

So u rce : R IET I (h ttp ://www.r ie ti.g o .jp /u se rs /a m u /e n /in d e x.h tm l)

* : The trade vo lum e is c a lc u la ted as the average of to ta l ex port and im port vo lum es in 2006, 2007 and2008 tak en from DO TS (IM F ).

**: G D P m eas ured at P P P is the average of G D P m eas ured at P P P in 2006, 2007 and 2008 tak en fromthe W orld Developm ent R eport , W orld B ank . F or M y anm ar's s hare o f G D P m eas ured at P P P , w e us e thes ahre o f Trade vo lum e bec aus e of the data c ons t ra in t .

*** : The B enc hm ark ex c hange ra te ($-euro/Currenc y ) is the average of the da ily ex c hange ra te in term sof U S $-euro in 2000 and 2001.

ii. Calculating the AMU Deviation Indicator

The nominal exchange rate of each East Asian currency in terms of the AMU is

used in order to determine its AMU Deviation Indicator. The AMU Deviation Indicator

signifies the deviation of each East Asian currency from the benchmark exchange rate,

vis-à-vis the AMU and is represented by a formula in the following manner:

.100

currency aAMU of rate exchangebenchmark

currency aAMU of rate exchangebenchmark currency a

AMU of rate exchange actual

(%)Indicator Deviation AMU

When the AMU deviation indicator of say, currency A is positive, it implies that the

23

24

currency A’s actual exchange rate vis-à-vis the AMU is higher than its benchmark

exchange rate vis-à-vis the AMU (this represents an appreciation of currency A against

the AMU). Similarly, when the AMU deviation indicator of say, currency A is negative, it

implies that the currency A’s actual exchange rate vis-à-vis the AMU is lower than its

benchmark exchange rate vis-à-vis the AMU (this represents a depreciation of currency

A against the AMU).

Table 1. AMU de-composition with three major currencies

Dependent Variable: AMU/SFR

Method: Least Squares

Variable 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Constant 0.0002 0.0000 0.0000 0.0000 0.0000 -0.0001 -0.0002 -0.0001 0.0000 -0.0001 -0.0002

US dollar 0.7046 *** 0.7080 *** 0.6496 *** 0.6511 *** 0.6302 *** 0.5844 *** 0.6361 *** 0.6754 *** 0.6865 *** 0.6472 *** 0.6808 ***

Euro 0.0153 -0.0106 -0.0321 0.0509 ** 0.0516 ** 0.0408 0.0830 * 0.1499 *** 0.1544 *** 0.1210 *** 0.0996 ***

Japanese yen 0.3219 *** 0.3267 *** 0.3177 *** 0.3298 *** 0.3462 *** 0.3763 *** 0.3109 *** 0.2238 *** 0.2254 *** 0.2584 *** 0.2123 ***

Adj. R-squared 0.9812 0.9793 0.9691 0.9814 0.9911 0.9719 0.9577 0.9458 0.9528 0.9737 0.9429

Autuors' calculation.Source: The Data of foreign exchange rate vis-à-vis the AMU are from RIETI and Datastream.Note: *** significant at 1% level ** sigunificant at 5% level * significant at 10% level

25

Table 2. The standard deviation of NEER (BIS) and NEER simulated under AMU peg

system, (Monthly data, January 2005 to June 2010)

People’s Republic of China (PRC) 8.280 2.715

Indonesia 7.785 1.630

Japan 7.968 2.773

Republic of Korea 13.038 1.160

Malaysia 2.699 1.677

Philippines 10.148 1.486

Singapore 3.728 2.321

Thailand 5.900 1.334

Author's calculation(1) Standard deviations of month end nominal effective exchange rates calculated by BIS.(January 2005=100).(2) Nominal effective exchange rates (NEER) under the hypothetical AMU peg system aresimulated by using each exchange rate vis-a-vis the AMU which is standardized 100 inJanuary 2005. The basket weights of NEER are same as those of NEER calculated by BIS.

Country NEER (BIS) (1)NEER simulated under the

AMU peg system (2)

26

Figure 1. The Estimated Coefficients of the AMU on US$, Euro and Yen

‐0.1000

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

The Estimated Coefficients of the AMU on US$, Euro and Yen

US dollar

Euro

Japanese yen

(Authors’ calculation)

27

Figure 2. The movements of NEERs and Nominal exchange rate vis-à-vis the US dollar

80

90

100

110

120

130

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Chinese yuan (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)

Nominal Exchange Rate (vis‐à‐vis the US$)

80

90

100

110

120

130

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Singapore dollar (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


80

90

100

110

120

130

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Malaysian ringgit (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


80

90

100

110

120

130

140

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Thailand baht (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


60

70

80

90

100

110

120

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Korean won (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


70

80

90

100

110

120

130

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Indonesian rupiah (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


80

90

100

110

120

130

140

150

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Philippines peso (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)


70

80

90

100

110

120

130

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Japanese yen (Jan 2005 =100)NEER (AMU peg)

NEER (BIS)



Note: AMU exchange rates are downloaded from RIETI. NEER (BIS) are downloaded from

BIS. Nominal exchange rates are downloaded from Datastream.

28

Figure 3. The AMU in Asian Crisis (January 1995 to December 2000)

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Jan‐95

Apr‐95

Jul‐95

Oct‐95

Jan‐96

Apr‐96

Jul‐96

Oct‐96

Jan‐97

Apr‐97

Jul‐97

Oct‐97

Jan‐98

Apr‐98

Jul‐98

Oct‐98

Jan‐99

Apr‐99

Jul‐99

Oct‐99

Jan‐00

Apr‐00

Jul‐00

Oct‐00

AMU in Asian crisis(Benchmark year=2000/2001)

U.S.$‐Euro/AMU

U.S.$/AMU

Euro/AMU

U.S.$/AMU

US$‐euro/AMU

Euro/AMU


29

Figure 4. The AMU Deviation Indicators in Asian Crisis (March 1997 to December 1998)

(a) With Indonesia

‐50

0

50

100

150

200

250

Mar‐97

May‐97

Jul‐97

Sep‐97

Nov‐97

Jan‐98

Mar‐98

May‐98

Jul‐98

AMU Deviation Indicators in Asian Crisis(benchmark year=2000/2001, basket weight=2004‐2006,daily)

People’s Republic of China (PRC)

Indonesia

Japan

Republic of Korea

Malaysia

Philippines

Singapore

Thailand

IndonesiaIndonesia

Philippines

Thailand

Republic of Korea

JapanPeople’s Republic of China

Singapore

Malaysia

(b) Without Indonesia

‐50

‐40

‐30

‐20

‐10

0

10

20

30

40

50

Mar‐97

May‐97

Jul‐97

Sep‐97

Nov‐97

Jan‐98

Mar‐98

May‐98

Jul‐98

AMU Deviation Indicators in Asian Crisis(benchmark year=2000/2001, basket weight=2004‐2006,daily)

People’s Republic of China (PRC)Indonesia

Japan

Republic of Korea

Malaysia

Philippines

Singapore

Thailand

Indonesia

Philippines

Thailand

Republic of Korea

Japan

People’s Republic of China

Singapore

Malaysia


30

Figure 5. The AMU Deviation Indicator (January 2000 to June 2010)

‐40

‐30

‐20

‐10

0

10

20

30

40

Jan‐00

May‐00

Sep‐00

Jan‐01

May‐01

Sep‐01

Jan‐02

May‐02

Sep‐02

Jan‐03

May‐03

Sep‐03

Jan‐04

May‐04

Sep‐04

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

AMU Deviation Indicators, Jan 2000‐ June 2010(benchmark year=2000/2001, basket weight=2004‐2006,monthly)

People’s Republic of China (PRC)

Indonesia

Japan

Republic of Korea

Malaysia

Philippines

Singapore

Thailand

Republic of KoreaThailand

Indonesia

Source: RIETI (http://www.rieti.go.jp/users/amu/en/index.html)

31

Figure 6. The Trade Balance with ASEAN, Japan, Republic of Korea,

and People's Republic of China (PRC), (1Q 2000 to 4Q 2009)

‐60000

‐40000

‐20000

0

20000

40000

2000Q1

2000Q2

2000Q3

2000Q4

2001Q1

2001Q2

2001Q3

2001Q4

2002Q1

2002Q2

2002Q3

2002Q4

2003Q1

2003Q2

2003Q3

2003Q4

2004Q1

2004Q2

2004Q3

2004Q4

2005Q1

2005Q2

2005Q3

2005Q4

2006Q1

2006Q2

2006Q3

2006Q4

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

(Millions of US$)

Trade Balance within ASEAN+3

Brunei Darussalam Cambodia People’s Republic of China (PRC) + HK, China

Indonesia Japan Republic of Korea

Lao People's Democratic Republic Malaysia Myanmar

Philippines Singapore Thailand

Viet Nam Trade Balnce

Source: Direction of Trade Statistics, IMF.

32

Figure 7. Capital Flow and the AMU DI

‐50

‐40

‐30

‐20

‐10

0

10

20

30

‐50000

‐40000

‐30000

‐20000

‐10000

0

10000

20000

30000

2000

Q2

2000

Q4

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

AMU DIBillions of WonCapital Flow in Republic of Korea

OTHER INVESTMENT LIAB., N.I.E.

OTHER INVESTMENT ASSETS

AMU DI (Korea)

‐40

‐30

‐20

‐10

0

10

20

30

‐80000

‐60000

‐40000

‐20000

0

20000

40000

60000

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

AMU DIBillions of RupiahCapital FLow in Indonesia



AMU DI (Indonesia)

‐25

‐20

‐15

‐10

‐5

0

5

10

15

20

25

‐400000

‐300000

‐200000

‐100000

0

100000

200000

300000

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

AMU DIBillions of BahtCapital Flow in Thailand



AMU DI (Thailand)

Source: Data of capital flow are from IFS (IMF). Data of AMU DIs are from RIETI.

33

hi-stat discussion paper

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